公共服務電力與天然氣 (PEG) 2006 Q4 法說會逐字稿

Welcome to the Public Service Enterprise Group fourth quarter 2006 earnings conference call and webcast.

[OPERATOR INSTRUCTIONS].

I would now like to turn the conference over to Kathleen Lally. Please go ahead.

Thank you very much and good morning to everyone. We appreciate you listening in today either by telephone or over our web site. I will be turning the call over to Ralph Izzo, PSEG's President and Chief Operating Officer, for comments on the Company's results and outlook. Also participating in today's call will be Tom O'Flynn, PSEG's Chief Financial Officer. Tom will provide a more detailed view of the Company's operating and financial results and the forecast for 2007. Before we begin, however, I just need to make a few points. We issued our earnings release this morning. In case you have not seen it, a copy is posted on our web site. We expect to file our Form 10-K with the SEC at the end of February. In today's webcast, we will discuss our future outlook and I must refer you to our forward-looking disclaimer.

Although we believe our forecasts are based on reasonable assumptions, we can give you no assurance that they will be achieved. The results or events forecast in our statements today may differ materially from actual results or events. The last word on any of our businesses is contained in the various reports we file with the SEC. As a reminder, our guidance speaks as of the date it is issued. Any confirmation or update in guidance will only be done in the public manner generally in the form of a press release or webcast such as this. PSEG may or may not confirm or update guidance with every press release. As a matter of policy,we will not comment on guidance during any one-on-one meeting or individual phone calls.

In the body of our earnings release we provided a table that reconciled net income to operating earnings. We've adopted this format to improve the readability of the release and to provide the required reconciliation between the GAAP terms, net income and income from continuing operations, to the nonGAAP term, operating earnings. The attachments for the press release provide the reconciliation to each of our major businesses. Operating earnings exclude merger related costs and the net impact of certain asset sales during the period presented. Operating earnings is our standard for comparing 2006 results to 2005 for all of our businesses. We exclude such costs so that we can better compare our current period results with prior or future periods. Finally, at the end of the prepared remarks, Ralph and Tom will take your questions. I'd now like to turn the call over to Ralph. Go ahead, Ralph.

Thank you, Kathleen, and good morning. I, too, appreciate the time you are taking today to listen to our call and I hope you've been able to review the earnings release distributed this morning. I'm pleased with the results we reported in that release. As you can see, our operating earnings of $3.71 a share came in at the upper end of guidance for the year.

Although we spent much of the year working to complete the merger with Exelon, we kept a close eye on maintaining strong go-it-alone capabilities. As a result, we not only ended the year with operating earnings at the high end of our guidance but also with our strongest outlook in some time. PSEG has been a successful company for over 100 years through many changes in markets and in the industry. And we're equally upbeat about our future. Operational excellence is the foundation for success in our business and, in 2006, we demonstrated excellence across the board. This is a tribute to the hard work of our talented and dedicated employees. The Salem and Hope Creek nuclear stations generated more electricity than in any single year prior to 2006.

And the fossil component at PSEG Power also had its best year of electric production. Strong nuclear and fossil operations enable us to benefit more fully from a favorable energy pricing environment and enabled PSEG Power to achieve a record level of operating earnings. PSE&G, our New Jersey energy delivery business, continued to operate with best in class reliability. Both electric and gas operations has never been stronger. PSE&G also received an important measure of rate relief in November of 2006 that will help its long term financial picture. In addition to providing a fair return for investors, the rate relief provides the resources needed to support our ability to provide safe, reliable service. PSEG Energy Holdings had its most profitable year due in large measure to outstanding performance from its two Texas generating stations.

We also reduced international exposure by selling investments in Poland and Brazil, in keeping with our long-term strategy for that business. I'm pleased to report that the remaining assets are performing on a more predictable basis. As for the future, we have a positive earnings trajectory based on a combination of strong operations, the prices we've contracted for our anticipated energy supply and an improving picture for energy capacity markets. Tom will provide more details on this in a moment. In addition to the results I just described, we've made progress with our most important near-term objective. I already mentioned the rate release that we received towards the end of the year. That will clearly be helpful. We've also completed the redesign of our organization and have most of the senior management team now in place.

We are continuing to address staffing needs while working to preserve many of the efficiency savings achieved during the merger process. We anticipate hiring back only 60% of the staff lost during the merger of [inaudible] process. This is exactly the stretch goal we had set for ourselves. We've also taken steps to make sure our nuclear progress continues. As you probably know, we will resume direct management of the Salem and Hope Creek facilities before the expiration of our nuclear operating services agreement with Exelon. The three key leaders managing Salem and Hope Creek are now employees of PSEG. We have great confidence in them, the stations and the future of our nuclear assets. I would be greatly remiss, however, if I did not recognize and extend our sincerest thanks to John Rowe, Jack Skolds, Chris Crane and the entire Exelon team for their cooperation and support during this process.

I cannot say enough positive things about the support being provided by Exelon management during this transition. We look forward to continuing the improvements and excellence in operations that they started at our sites. And with Bill Levis, Tom Joyce and George Barnes' leadership, we're confident about that future success. Over the past year you also saw the continued reshaping of our portfolio of assets. The changes made during the year were designed to improve our returns, strengthen the balance sheet and sharpen our focus on core operating areas. We remain committed to improving the balance sheet by further reducing debt and, as our financial strength improves, we will be able to pursue options for future growth. The actions taken over the past year coupled with higher energy prices support our forecast improvement in 2007 operating earnings to a $4.60 to $5 per share with growth in 2008 in excess of 10%.

Power prices have declined since we made this forecast in the fall of 2006, but significant forward hedge ratios, the sale of Lawrenceburg and a reduction in financing costs continue to provide us with confidence in our forecast. We're in the process of developing our long run business growth strategy and we will provide you with an update on March 26 when we host the meeting for the financial community at the Waldorf Astoria in New York. Now, Tom will review the fourth quarter and our outlook for 2007.

Thanks, Ralph. Good morning. Let me first extend our welcome to Kathleen Lally, our new Vice President of Investor Relations. Many of you know Kathleen from her former role and you'll be happy to know she continues to have a lot of tough questions for us and keep us on our toes.

PSEG reported operating earnings for the fourth quarter of 174 million or $0.69 per share versus 233 million or $0.94 per share for the 2005 fourth quarter. The strong results for the recent quarter overcame a charge of $0.10 per share of power related to the impairment of turbines to be sold in 2007. And I also want to remind you that last year's results include a gain of $0.18 from the sale of the Seminole lease. The year, PSEG reported operating earnings of 938 million or $3.71 per share compared to 2005 amounts of 918 or $3.77 per share. The results for '06 are based on 252 million shares outstanding, a 3.3% increase over 2005.

PSEG's results for the quarter and the year are defined in large part by strong performance from our generation fleet and higher power prices offset by warmer weather. For the fourth quarter, Power reported operating earnings of 102 million or $0.40, an 11% decline from the 113 million or $0.45 from a year ago. As you know, a number of our strategic activities were reviewed in a different context during the merger process. Shortly after the termination of the merger, the power took a close look at two assets in its portfolio that had uncertain long-term value for us, namely Lawrenceburg and four EA turbines. Lawrenceburg is a 1,100 megawatt combined cycle gas unit in Indiana that did not integrate well into our PJM Eastern based portfolio. During 2006, it produced an operating loss of over $0.10.

And although we anticipated improvements in the future, we believe that the unit may be worth more in the hands of another owner. Early in January, we announced the sale to American Electric Power and recorded an after tax loss of 210 million and the unit was moved to discontinued operations in the fourth quarter. Upon completion of the sale, we expect to receive approximately 425 million of after tax cash flow. As for the turbines, Power has no immediate use for these units and with the passage of time our valuation is that newer technology proved to be more flexible and efficient in new projects.

This analysis coupled with interest by a number of potential buyers caused us to decide to monetize these assets and recognize an impairment of 44 million or $0.10 in the fourth quarter. This loss is included in our operating earnings for the quarter and the year. For the year, Power reported record operating earnings of 515 million or $2.04 per share, an 11% improvement over '05's operating earnings of 446 million or $1.83 per share. Power saw an improving margin during the quarter and the year as a result of higher prices for our contracted output and other market hedging activities. Given our strategy of contracting for a few years into the future, we generally experience market prices on a lag basis. Higher pricing added $0.22 to earnings for the quarter and $0.84 to the year. The continuation of strong operations from our nuclear fleet also supported margins for the quarter. Nuclear units operated at a capacity factor of 96% in the fourth quarter resulting in full-year capacity factor also at 96%, which included a record refueling outage at Salem 2 of under 22 days. This performance added $0.02 per share to Power's earnings for the quarter.

Earnings were improved by $0.20 per share for the full year as a result of the fleet's year-over-year improvement. Higher prices and increased output more than offset the effective higher depreciation expense in 2006, the operation of new assets and the absence of nuclear decommissioning trust fund gains of $0.05 per share recognized in last year's fourth quarter. Power's fourth quarter earnings for the BGSS were also down $0.11 versus an unusually strong fourth quarter 2005 that benefited from very high post hurricane gas prices in normal weather. In contrast, fourth quarter '06 was hurt by warm weather and the lingering effect in inventory costs of last year's gas price run-up. This $0.11 impact during the quarter brought the full-year impact to $0.22 per share lower than a strong 2005. Looking forward to 2007, our inventory position is better balanced and with some more normal weather, we would expect the BGSS contribution to improve in 2007 by approximately $0.10 to $0.15 over 2006.

Operating earnings for Power in 2007 are expected to be in the range of 770 to 850 million. The mid point of this range represents a 295 million increase, a greater than 50% improvement over our '06 operating earnings. The key drivers to this increase are the higher prices for our nuclear and coal output that are realized because of the rolling nature of our forward hedge positions, the expiration of our contract with United Illuminating in Connecticut, the sale of Lawrenceburg and our projected improvement in margins on serving the BGSS contract. In addition to improvement in energy markets, the redesign of capacity markets will also provide reasonable signals for reliability and is expected to enhance Power's margins.

There were two positive steps in December related to capacity design. First, the transitional period began with a forward capacity market in New England. Capacity prices in New England are approximately $3 per kilowatt month. Second, the FERC approved the reliability pricing model for PJM with implementation in June of 2007. Both market changes are expected to be accretive to Power and a forecast to add approximately 100 to 150 million to Power's 2007 margins. Overall, a gross margin per megawatt hour has increased from approximately $33 per megawatt hour in 2005, to approximately $38 per megawatt hour in '06 and is forecasted to expand in '07 by approximately another $10 per megawatt hour.

As you recall, we were pleased to announce during the fourth quarter we received approval to extend the in-service date of pollution control facilities at Hudson Unit 2 for four years beyond 2006 under an agreement with federal and state environmental authorities. The agreement requires PSEG fossils undertake a number of plant modifications and operating changes to meet targeted reductions in emissions of Knox, SO2, Particulate Matter and Mercury. We also agreed to notify the authorities by the end of 2007 whether we will install the additional emissions controls at Hudson Unit 2 by the end of 2010 or plan for the orderly shut down of the unit. We're in the midst of completing detailed engineering work in updating our projection of our environmental capital costs for our 2006 Form 10-K. As many of you are aware, the markets for major environmental and construction projects are tight. We may see some increase in our current estimate of environmental capital costs of 4 to 500 million for Hudson and 300 to 450 million for Mercer. PSE&G, our electric and gas utility company, reported operating earnings for the quarter of 64 million or $0.25 per share compared with 66 million or $0.26 per share from a year ago. The challenge with PSE&G in the quarter and for the year has been weather and extended delay in receiving rate relief.

For the fourth quarter, warmer than normal weather reduced earnings PSE&G's earnings by $0.06 per share versus prior results and also versus normal. For the full year, warmer than normal weather reduced PSE&G's earnings by $0.12 per share versus normal and by $0.19 per share versus 2005 reported earnings. Higher transmission revenues, a reduction in operating expenses and a true-up for taxes in the quarter allowed PSE&G to almost offset the negative effect of weather.

For the year PSE&G reported operating earnings of 262 million, $1.04 per share a 27% decline over '05 operating earnings of 347 million or $1.42. The decline reflects the abnormal weather conditions and the delayed rate relief. Operating earnings for PSE&G are forecasted to improve in 2007 from to 330 to 350 million. The midpoint of this range represents a 30% improvement over '06's operating results. The full-year effect of the gas and electric rate agreements approved in November, coupled with more normal weather are the primary drivers behind this forecasted improvement.

PSEG Energy Holdings reported earnings for the fourth quarter of 24 million or $0.10 per share compared with 72 million or $0.30 per share from the fourth quarter of '05. The quarter over quarter results primarily reflect the absence of an $0.18 per share gain at resources from the sale of the Seminole lease and some other items as illustrated in attachment 7. For the year, Holdings reported operating earnings of 227 million or $0.89 per share, a 10% improvement over '05's operating earnings of 196 million or $0.81 per share. These results for '06 include a mark to market gain of $0.11 per share. Holdings 2006 earnings are note worthy considering global has reduced the invested capital in its portfolio by over 500 million over the past three years, shown in attachment nine.

This decrease was driven by over 900 million of sales in nonstrategic international investments and an after tax gain of 50 million over this time frame. As a result, over 90% of global's portfolio consists of its investments in Chile and Peru primarily stable distribution companies and our U.S. generation business. The sale of assets and reduction in recourse debt by Holdings will allow the subsidiary to dividend 95 million to PSEG in fourth quarter. Operating earnings for Holdings are forecasted to decline in '07 to 130 to 145 million. The largest reduction from '06 to '07 is our Texas assets due to a variety of factors including the absence of '06's mark to market gain, a modest decrease in spark spread year-over-year and additional planned maintenance outages. We also anticipate that the implementation of the new accounting standard for uncertain tax positions, FIN 48, will reduce Holdings earnings, particularly with respect to some leases at resources.

Finally, I'd like to make some comments regarding our consolidated cash flow and liquidity. In 2006, cash flow from operations was very strong generating 1.9 billion. This represents an improvement of 925 million from last year. The improvement was largely due to reduced cash collateral posting by Power and improved receivables. Absent changes in working capital, cash from operations improved by 100 million year over year. In addition to meaningful excess cash from operations during 2006, the after-tax cash proceeds from the sale of assets at Holdings contributed more than 600 million of additional cash flow. This primarily reflects the sale of our interest in RGE and two generating facilities in Poland. In total, excess cash to pay down recourse debt was about 950 million.

We have available liquidity at year end 2006 exceeding 3 billion. In the fourth quarter, we refinanced 3.2 billion of credit facilities at each of Enterprise for 1 billion, Power for 1.6 billion and Utility for 600 million. All three credit facilities mature in 2011. Debt reduction has materially strengthened our balance sheet. In conjunction with refinancing our credit facilities, our covenant calculations were relaxed by our lenders. Normalizing for changes to our covenant calculations, we reduced our financial leverage by about 4 percentage points during 2006. If we also pro forma for the anticipated proceeds from the sale of Lawrenceburg, we will have reduced our leverage to about 50%.

This reduction of leverage is expected to reduce operating expenses at the Holding Company level to a range of 50 to 60 million in '07 versus 66 million. In summary, we're pleased with our performance for 2006 and believe we're well positioned for 2007. Highlights include, as Ralph went through, earnings are expected to grow by one-third from $4.60 to $5 per share. Our capital structure is improving. Operating risk has been reduced. We have improved operations with a strong forward hedge portfolio, and reduced international risk. Now, Ralph and I would be pleased to take questions.

Ladies and gentlemen, we will now begin the question and answer session for members of the financial community. [OPERATOR INSTRUCTIONS]. And the first question is coming from the line of Ashar Khan with F.A.C. Capital. Please proceed.

Good morning. Tom, could you just go over what the hedges are? Could you update your hedge information, the last information I had was that E.I., could you update what the hedges stand currently for '07, '08, '09?

Ashar, those are generally still regional numbers and still regional ranges for those folks who that don't have the information for the E.I. presentation we said in '07 we were about 85 to 95% hedged, '08 was 65 to 80 and '09 was 10 to 40. Those are still reasonable ranges. When we talk hedge ratios, we generally talk about our forward, nuclear and coal as that represents about 85% of our megawatt hours but a higher percentage of our margin. We also would expect to update those in the cave. If there are any material changes.

I guess this B.G.M. auction will moved those hedges up. Is that a fair assumption?

The B.G.S. auction does expense next week. As you probably know, we're not able to comment on that even to the extent that we're participating in it for confidentiality reasons. Yes there is a B.G.S. auction next week. Yes it does allow all generators an opportunity including ourselves to participate to move those hedges up.

If I could just end up. Could you just give us what is, I know you mentioned the $10 margin improvement in '07, gross margin, could you tell us roughly what it would be in '08, I guess, which is in excess of 10% the guidance?

Yes. This is your last first question. It would not be -- we would still see margin improvement from '07 to '08. It would not be in the magnitude of $10 per megawatt hour but it would support an overall earnings increase for PSEG of 10% or more from '07 to '08.

Okay. Thank you.

The next question is from Paul Ridzon, with Key Banc Capital Markets. Please proceed.

Ralph, is your strategic review of Holdings complete or could we see some more divestitures?

Ralph,your strategic review of Holdings complete or do we see some more divestitures? Well Paul, that is a work in progress, we're looking at the whole portfolio there, and we may be able to say modestly more things in the March time frame at the analyst conference but right now, I'd just as soon leave it at that.

And Tom, just more granularity around the 4.60 to 5, has the pullback put the top end of that pretty much out of range at this point?

We generally, Paul, don't comment on, you know, ranges within ranges. I'd say, you know, since the E.I., prices have come down a little bit, two to four bucks depending upon where you are in the curve. At the same time, there have been some offsets. I think we mentioned that Lawrenceburg had been an operating drag. That won't be there in '07. We're still very comfortable with our 4.60 to $5 range.

[Inaudible] A $0.10 loss from Lawrenceburg?

Yes.

Thank you very much.

Yes.

Your next question is coming from the line of [Andrew Levy]. Please proceed with your question.

Hey, guys.

Hi.

Hiring Kathleen's like letting the fox in the hen house but congratulations. Hey, Kathleen.

I'd rather have her ask us questions.

A very smart fox, though. So it works out well. Just a quick question, Is there any political pressure that you guys are seeing just relating to electric rates?

Well, I think that there's always political pressure to keep electric rates under control, Andrew, but the reality is if you look at the retail rates New Jersey is seeing and how they've moved to other states nearby, it's a real tribute to the intelligence of the design of the B.G.S. auction. So it's been, I think it's been a regulatory success here.

Thanks.

The next question comes from Paul Patterson with Glenn Rock Associates. Please proceed.

Good morning, guys.

Good morning.

Just the energy Holdings. I guess you guys are not expecting a mark to market gain and that sort of explains I guess about a third of the decrease that you're expecting for '07. How does the other, the new accounting standard and the spark spreads break out after that?

I think in general, if we take Texas first of all, Paul, this year our net income after tax contribution in Texas was 80to 85 million bucks. As you see in one of the attachments, almost 30 of that was mark to market, was 28,29. So you kind of back into a mid 50s type of number excluding the mark to market. We're not anticipating mark to market this year, and we expect Texas to be down about 20 million bucks. Probably the biggest piece of that is sparks coming from last year I realized sparks were 19 to 20. We got in our forecast right now about 15 to 16. And then so that brings you down about two thirds of that decrement and then other piece would be some maintenance outages we do expense those as they come along so that's the biggest. That's kind of a water fall, if you will on Texas. With respect to fin 48, I caution that we are still reviewing this. It's a very detailed and cumbersome thing to work through. We have been talking about this for a few months. I think in general, our guidance would contemplate a fin 48 head wind, if you will, a reduction to earnings in the mid 20s.

Okay. Then just on the nuclear capacity factor for '07 and owe 08, did he say it was 96% for the year in '06? What do you guys think with refueling and everything and your schedule and just your expectation for '07 and '08 going forward.

96% was a good number. We wouldn't count on that but it would be a number in the low 90s.

Thanks a lot.

9 0, 92, something in that kind of range.

Your next question is from Zachary Schriver with Duquesne Capital Management. Please proceed with your question.

Hi it's Zach Shriver from Duquesne. Congratulations, Kathleen.

Thank you, Zach.

Just a quick question tom, on the R.P.M., the 100 to $150 million,that a year-over-year number or is that an absolute number?

No, it is a year-over-year number because in '06 versus '07. Consistency we talked about in November at the E. I. P.G.M., R.P.M. as you well know has generally come through as anticipated. The '06 is obviously smaller so you would expect another increase in '07 and '08 even if the dollars per kilowatt year don't change just because the P.G.M.R.P.M., we really don't get a lot for the first five months of '07.

Got it. On the CapEx environmental side, is there any way you can sort of put some parameters around it? Is it, I mean, since I got from your comments was maybe it's a little bit higher, not a huge amount but can you just collaborate how much higher and put parameters around that?

I'd rather stay away from that. We are as I said, doing detailed engineering estimates and we're also in the middle of some negotiations and discussions with some outsiders. I'd say Zach, we generally see it as a manageable number but I think the purpose was to just remind people as you've probably seen from other folks in the sector, that there is some pressure and you may see in. It's a manageable amount but it's certainly enough it's we're working our best to manage it.

Got it. Can you just remind us on the number of megawatts that you would be scrubbing and referencing so we just have some benchmark whether it's you $300 or $200 a kilowatt or 600?

Hudson's at six and Mercer's the same.

All right.

So the other day on Hudson, you can just that's a simple number we talked about 4 to 5. We talked about four to five with some moving. You still see. Hudson has located a very attractive place the most constrained area of our load pocket.

Sure.

Just off the Pulaski way for those of you who drive in New York city. And it's still an attractive facility in a very key location.

Got it. And on this Connecticut lawsuit, I mean, is there-- to us, it doesn't seem like the Attorney General would have any way to, I mean, do what he's proposing to do and, you know, FERC regulation and is that the proper way to think about this or is there any way that there's some sort of wrinkle in which that, you know, Connecticut can try and impose its regulatory jurisdiction over, you know, apparently deregulated generation?

Yes, Zach. I don't think we want to be giving legal views over the wire. There has been some press up there. I just say there was certainly a sale up there. There was fully competitive with the plants. It's a good competitive market, the energy prices, F.C.M. in there. I'd say from our own standpoint, if you just look at the total ball of wax, we expect to do well in '07 but we did not do well. Certainly in '06 and '05 if you look at the full package.

That's true.

Given that we sign a three-year contract with E.I. in late 2003, if you look at the full package of our profitability up there, it's been quite marginal until the last couple of weeks. But anyway, we think all of the pieces of building the market makes sense. But there's no detailed piece of legislation to look at right now. It's really more things are off the press.

Last question. On cold costs, you guys getting helped by lower coal costs?

Maybe to a modest extent. We tend to hedge pretty far forward so if we did it would be in '09,'10 timeframe.

Got it.

Our coal buy may be even a shade longer than our forward hedging.

Got it. Thanks so much, guys. Congratulations, Kathleen. Thank you, Zach.

[OPERATOR INSTRUCTIONS]. The next question is from [Daniel Sites]. Please proceed with your question.

Thank you. I wanted to clarify, the 100 to 150 million is just for the R.P.M. or does it also include New England?

That would be all capacity.

Okay. And it would include New England as well?

It would include New England and it would also include New York [Inaudible].

And may I ask do you feel that you have pretty much done the asset sales to do at holdings?

Daniel, I'd go back to Ralph's question- I mean response to that. I think we've --

I mean, you seem to be reaching a steady state there?

Yes. I think we've sold the assets that are the largest in an area that we don't have a regional mass of assets. Certainly, the U.S. assets have a lot of fit to us. It's Texas and smaller I.P.P.s and California plants that all consistent with our strategy. There are a lot of assets in Latin America. I think it's well said. We are doing reassessment of those. Nothing at this point to report. We may have discussion of those at our analyst session in late March. I think we just say consistent with what we've done the last couple years. From time to time with those opportunistic things for us to pursue. Nothing specific at this time.

Great, thanks.

The next question is from Deutsche Investment Management. Please proceed with your question.

Hello. Thank you. Nobody has said before so I'm glad to hear somebody said that. Bigger question for Ralph or Tom strategic question that '07/'08 may be a catch up years for you as you show some improvement in earnings. So when do you see the normalization of earnings? Is it at the end of '08 or do you think there are more drivers in '09 and beyond to grow beyond the normal growth rate?

We would see that after '08.

You're asking --

What I'm asking is when do you reach the normalized earnings level? Is it in '08 or other drivers to continue to grow beyond normal growth rate?

Yes. We talked about growth from '07 to '08. As you look out after '08, very much of it gets into the markets, driven by power. PSE&G and Holdings are relatively stable. PSE&G in '07 has got to a normalized earnings level. Holdings businesses are reasonably stable. So the growth to come from power as we've said it takes a couple years for us, couple three years for to us lag into the forward curve. That's happening over '07, '08. We do have one meaningful contract that drops off at the end of '08, that a 500 megawatt sale that is round the clock sale that is a number of years old. That is last of our older contracts, so that'll be a nice embedded pop from '08 to '09. After that it's looking at the forward capacity in energy curves and also with some growth initiatives that were thinking through at this time.

Clearly just to follow up with what Tom said, the whole reason for positioning the balance sheet would be to take advantage of opportunities that will exist 18 to 24 months from now, and just being able to play in that market fairly forcefully and with growth in mind.

Right. And what about the carbon isolation? Will that also give you some kickers some.

Yes. We're part of the clean energy group. We've supported several of the proposals discussed in Washington. Clearly a carbon constraint future is a positive future for our shareholders. No doubt which position we will be speaking out in that arena.

All right. Okay. Thank you.

Thank you.

The next question is from Clark Orsky with K.D.P. investment advisors. Please proceed.

Yes, a couple more on Holdings. Can you tell me what cash at Holdings was at the end of the year and what cash flow from operations was for the fourth quarter?

You say cash flow from operations or cash on hand?

Both.

Cash on hand, I think, was reasonably modest. I think I said that we paid a $95 million dividend in December, I believe cash is in the $30 million range at the end of the year.

Okay.

And cash from operations for the year was in the 150 million range.

Okay. And was debt pretty much the same as it was at 9/30, that level at Holdings?

Yes. There was no material -- Holdings, we have a bank line that we use very, very infrequently. It's 150, 200 million line. But there was 1.15 billion of Holdings bonds outstanding and those were still outstanding. We made purchases on those obviously over the last couple years, but 9/30 to 12/31 there's no change.

Just a couple on the guidance for Holdings. Is there a tax rate we can use for Holdings for next year?

We have to get back to you on detail. It does move around a little bit. Especially some of the tax rate is a function of consolidation, especially some of the resource leaflets.

Right.

In general, our -- the U.S. businesses tend to tax at the full rate, 40% or so. International businesses, we book at a lower rate. So maybe the number's in the 20s.

Okay. Just wondering about equity and earnings next year and sort of what's baked into your forecast.

For holdings?

Yes. Similar to this year I think was 120 for the year or something?

Well, we said 125 to 140 as outlined in our release. The way to that I about it is the businesses down, in Chile and Peru is quite stable. Texas, I think I went through that with an earlier caller. That we see coming down with the mark to market and about 20 million after tax in net income with maintenance. And then the other businesses are smaller contributors. And the other piece it's a noncash piece. And it's related to SFAS 13.2 in the mid 20s. It is a drain.

Okay.

Okay.

Appreciate it.

Mr. Izzo, there are no further questions at this time. Please continue.

Thank you very much. We again like to thank you all for participating in the call, and if you have any further questions, please feel free to call us. I can be reached on 973-430-6565 and either myself or any member of the I.R. team will be happy to help. Thank you.

That ladies and gentlemen, that does conclude your conference for today. Thank you for participating. You may now disconnect.